May 2013

May 26, 2013

If any of us in this room run up debts, which - if we are typical UK citizens, we will - we know that there are two remediesthat we can take to deal with the problem. The first is to spend less and thesecond is to increase our income. If we are able to do them both simultaneously, so much the better. And so it is for government.

It seems very surprising to me that there are still some who do not understand how important it is to deal with our current level of debt. The global economy has expanded by almost 55% in real terms since the year 2000, growing from $32.2 trillion dollars, to $69.7 trillion last year. Why, we should be asking ourselves, are we not sharing in that growth. The answer is that we are too heavily indebted, too heavily taxed and too heavily regulated, especially in today’s global economy. Money goes to where money can be made and money can be moved, and the sad truth is thatBritain and the other Western economies are less attractive destinations for such money than we need them to be.

But let me have a minor digression to consider debt as a strategic issue. Our past is littered with examples of empires weakening, or in some cases falling, as a result of economic weakness.

Hapsburg Spain defaulted on its debt 14 times between 1557 and 1696 and suffered rapid inflation as a result of an influx of New World Silver.

This economic weakness coupled with the outcome of the Nine Years War and the death Spain’s Charles II saw the end of Hapsburg Spain.

Or look at pre-Revolution France.

By 1788, Bourbon France was spending 62% of royal revenue on servicing its debt.

It is no coincidence that some historians claim 1788, and not 1789, to be the true start of the French Revolution.

It was on the 7th of June of that year that one of the first revolts occurred over an attempt by the government to enact new taxes to deal with France's unmanageable public debt.

Or look at the Ottoman Empire.

The Ottoman Empire was paying 50 percent of their budget on debt interest payments by 1875.

In fact, the last payment on Ottoman debt was finally made by the Republic of Turkey in 1954 - even though the Ottoman Empire was dissolved 36 years previously!

The dire economic situation was only exacerbated by numerous wars and conflicts leading up to World War I and the Ottoman’s ultimate defeat.

And we shouldn’t forget our own history.

The contraction of European influence in the 20th century was driven as much by the economic exhaustion of European nations over two World Wars as it was by political enlightenment in support of decolonisation.

As a result of the First World War in the 1920s and 30s, Britain’s national debt was regularly over 150% of GDP.

After World War Two, it peaked at around 250% of GDP.

As examples of the effect on UK foreign policy, economic considerations underpinned both the British withdrawal from Palestine in 1948, and the abandonment of the Suez campaign in 1956.

It wasn’t until the 1970s that the debt position recovered to under 50% of GDP – a quarter of a century after the end of the War.

Britain’s so-called ‘East of Suez’ moment in 1967 when the Wilson Government announced a major withdrawal of UK forces from South East Asia, was a response to the decline in the country’s relative economic strength.

Thus, big government debt is a strategic liability for our country, but it is also the enemy of wealth creation.

So where are we now? At the end of this financial year, our public sector net debt will be around £1200 billion and we will be paying over £47 billion in interest payments alone – costing eachtaxpayer around £1250 per year, rising to around £1700 each by 2015/16. Our debt interest is now the fourth biggest recipient of public money in Whitehall. What is worse is that the year after next, our debt interest will be higher than our education budget and the third biggest recipient of taxpayer’s money. In a true monument to socialism, we will be spending more money servicing ourdebt than educating our children.

And this is the real problem with debt. It has to be repaid by someone, some time. So let’s start to talk about what debt really is – it is simply deferred taxation. Government debt requires us to havetax rates far higher than they need to be, creating a disadvantage for our wealth creators compared to their competitors in other, lower tax, economies.

But there are a few other ground rules that we also need to understand if we are to help our entrepreneurs.

First, growth and wealth creation are not the same thing. You can get economic growth with higher government spending and borrowing, but it is only an illusion of prosperity.

Second, Governments can create the optimal conditions for wealth creation, but it is entrepreneurs who will ultimately provide it.

Third, Government must champion both aspiration and opportunity. Without opportunity, aspiration can merely result in disappointment and bitterness.

If we are to begin to set the appropriate conditions for more wealth creation, then Government must control its spending or it will squeeze out the entrepreneurs. I believe that we should aim tofreeze public spending for at least three years, a move that would see baseline spending totals £70.4 billion lower than today. If we were to go further still and freeze public spending for five years at 2012/13 levels, annual spending would be £91.2 billion lower in 2017/18 and the cumulative saving over five years would be an incredible £345 billion. It would go a long way to putting us on a sound and sustainable footing in our public finances and maximise the chances of finances being available for a growing private sector.

As economic recovery gathers pace we need to return to the concept of sharing the proceeds of growth. But this time, instead of sharing the proceeds between public spending and deficit reduction, we need to share the proceeds of any growth between tax reduction and ultimately debtreduction.

We must encourage competition as it is the means by which we measure our respective talents against one another and generate efficiency and excellence.

We will also need to take a radical review about what government does, and does not, need to do. A further round of privatisations and asset sales would not only improve the public finances butwould create a competitive space in many sectors of the economy.

Small businesses are the cornerstone of our economy and will create the employment of the future. We must support the corner shop owner who stays open late at the expense of family life, the smallbusiness owner who hasn’t had a holiday for years, and the young graduate with the bright idea who needs finance to turn it into a wealth creating reality.

We must reward those who take risk in the taxation system for without risk, there will be no innovation. If we see every tax break and incentive for the wealth creators as “a tax on the rich”, we will not create the environment where would-be innovators will see the balance of risk and reward as being in their favour.

Let me just take one example – capital gains tax. You’d be hard pressed to find an independent economic analyst to dispute the assertion that a tax on capital gains does not inhibit investors fromrealising their assets. That’s why I would like to see the tax reduced, if possible to zero, for a minimum period of at least three years, creating a tax window that will encourage businesses to sell assets, invest in capital, and generate value for the economy. Any fall in revenue at the Treasury would be offset handsomely by the increased business activity and job creation the measure would encourage.

Suspending capital gains tax would be a radical statement that shows the world Britain is open for business. We have travelled too far down the road of allowing ourselves to believe that wealth isan embarrassment, where in fact, it is what creates jobs, higher tax revenues and new inward investment.

We need to understand that in the new, highly competitive global economic environment, entrepreneurs will be the drivers of change and the generators of prosperity. Only by creating the appropriate financial, regulatory and political environment will we be able to set free the talents of the entrepreneurs who will enable us to provide the cutting edge technologies, we will require to compete in the globalised era.

There is no question that entrepreneurship is booming - as Lord Young’s recent report on small businesses showed, the recession has produced half a million net new businesses. If we are toencourage this trend we need to have a tax cutting agenda.

The future is not with big Government but with big ideas, not with the suffocating state but with the empowered individual, with the wealth creators not the wealth consumers. Much of it will be in thisvery room.

Higher taxes limit aspiration, but most pressingly, they encourage businesses to sit on their hands rather than get out into the global market and sell hard. It should go without saying that, if we are to create growth, economic activity must be encouraged, not stifled, but that is not the conclusion an external observer would draw from our existing tax system.

Britain is brimming with entrepreneurial individuals who want to make a better life for themselves - to own a home, run a business and secure a more prosperous future for their children. To give them the opportunity to realise this aspiration, bold and strategic measures are necessary. A radical approach, rewarding the risk-takers, and energising the entrepreneurs, is what can get us back on track, and reverse the damage wrought by Labour.